Trade and the Environment: Spatial Separation under Product Differentiation

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Abstract

  This paper presents a two-country model of monopolistic competition in which production of differentiated products in the manufacturing sector lowers productivity in the agricultural sector through a cross-sector pollution externality. We show that free trade raises the spatial separation of the incompatible industries and is possibly harmful to the country that becomes a net exporter of the manufacturing products. Also, we reveal that with product differentiation, trade only in the manufacturing products can be the most beneficial trade regime for the country holding a comparative advantage in those products.

Journal

  • The International Economy

    The International Economy 2010(14), 95-112, 2010

    The Japan Society of International Economics

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